erisa vs non erisa 403b and testing

[Guest brapshwing]

I have a prospect/nonprofit who is interested in an erisa 403b plan. The previous CFO set up a non erisa 403b plan and then the nonprofit put ER contributions into the plan. The CFO also embezzled money and evaporated! I am working with the new CFO and at this point they have frozen the previous plan so they can make it right (or try).

The new CFO was directed by counsel to discontinue old plan and set up a new plan so they can effectively deal with the mess. Counsel recommended non-erisa 403b and then a 457 if desired. The new CFO is interested in an ERISA 403b plan so they could do a discretionary ER contribution if and when desired. They are uncertain as to how often they will actually make an ER contribution and whether it would be a match or just ER contribution. The new CFO likes the accounting of the 5500 for the plan.

1. Does having an ERISA 403b plan have limits relative to the non erisa 403b? Example: Could there be a limit what an HCE can put into the plan in a year the nonprofit did not make a contribution to the plan?

2. If having an ERISA 403b limits in any way what the HCEs can contribute, wouldn't it make sense to do a non erisa 403b and then put in a 401a and 457?

The nonproft has about 50 employees and 35 participants, 5 of whom are HCEs. My thought was to go non erisa 403b for simplicity and then add bells and whistles with 401a and 457. Am I on track?

This is a great forum. Thanks for reading.

Troy

Sales Guy Trying to Keep Pencil Sharp

[Guest mjb]

1. there is no difference between erisa and non erisa 403b plans in contributions by HCEs who can contribute up to 15,500 (20,500 if age 50) without any ADP testing.

2. an employer can make discretionary contributions to a 403b plan on a non periodic basis as long as the contributions do not favor employees who make more than 100k a year, subject to a max limit of 45k (50 if age 50) which includes the contributions in 1 above.

3. employer could establish a 457(b) plan for a select group of management employees which would allow additional contributions of 15,500 above the limits in 1 and 2 by either the employee or employer on a discriminatory basis.

4. employer could also maintian a 401(a) plan and make nondiscriminatory contributions of up to 45k for any employee under the rules for qual plans in additon to the amount contributed in 1,2 and 3.

[TLGeer]

The limitations do not change based on whether or not the plan is subject to ERISA. However, a penny of employer money makes it an ERISA plan. So does a restriction on product vendors that doesn't jump through the hoops in the ERISA non-plan exclusion regs for 403(b). In addition, with the advent of the final regs, the employer is going to have to do some compliance with 403(b), regardless of ERISA status, and getting that done will be a hassle and an expense unless the employer takes a subsidized deal from, say, an annuity provider. And taking the subsidized deal will raise questions about fee levels and allocations within the products offered by the subsidizing provider.

There is no particular reason to toss a 401(a) into the mix, other than to maximize employer contributions. A 403(b) lets you make the maximum under 402(g) and a 457 lets you make the 457 maximum. And putting a 401(a) into place to make the first dollar of employer contributions raises complexity and costs in non-useful ways. It would be better and cheaper (all costs in) to create an ERISA 403(b) and a 457.

Now, once you've done that, you can put a 401(a) on top of that, because the 403(b) is not a plan of the employer for purposes of the overall 415 limitations. But in the meantime KISS.

Tom Geer

[J Simmons]

Tom,

I thought EGTRRA requires, post 2001, that 403b benefit accruals count towards the 415 limit on benefits accruals. IRC §415(a)(2)(B); Treas Reg. §1.415-6(e)(1).

... once you've done that, you can put a 401(a) on top of that, because the 403(b) is not a plan of the employer for purposes of the overall 415 limitations.